When it comes to bonds and interest rates, the market is a great equalizer

I have two questions about bond investments. First, with individual bonds, would I be better off keeping the bonds to maturity when rates go up and receiving the full value at maturity? Or should I sell and reinvest in higher-interest-rate bonds? Second, does this work with bond funds? Do fund managers hold bonds to maturity, or do they sell and reinvest when interest rates are going up?J.T., Austin

On highly liquid and secure issues such as Treasuries, the market adjusts the price of the bonds so that the discounted present value of an older, lower-coupon obligation stays identical to the present value of a new bond with a higher coupon. Some of the damage done to lower-coupon bonds in a rising rate market is reduced by reinvestment of the coupons at the new, higher rates. Basically, it’s a tossup, but some managers realize and use the capital losses.

You can learn the basics of all this by reading the classic Inside the Yield Book by Sidney Homer and Martin L. Leibowitz, which was published in 1972.

I have questions about the limits on required minimum distributions. I am a 70-year-old divorced female in good health. I retired late last year. In January, I set up monthly RMD withdrawals to meet my obligation for 2013. The withdrawals are deducted from my money market fund in my SEP IRA account. The amount of my annual RMD was based on a percentage of my account balance at the end of 2012.

The total value of my account rose by nearly $8,000 during the first quarter of 2013. I’m not sure, but I think at some point my RMDs are legally obligated to empty the SEP IRA account. If I can grow the account balance while making future RMDs, can I continue to invest? If that is permissible, will I be required at some point in the future to move all the remaining funds to a taxable account?M.F.

You have no cause for worry. Many people have had the good fortune to make their retirement accounts grow even while they are taking required distributions. It’s pretty easy at the start. The initial withdrawal rate is only 3.65 percent. But the rate climbs every year. Sooner or later, it will be well beyond any reasonable expectation of annual gains. When that happens, the account will start to shrink.

Most people who take RMDs die before the withdrawals are so large that their accounts shrink rapidly. You can understand how this works by playing with a calculator at Fidelity at https://web.fidelity.com/mrd/application/MRDCalculator.

This calculator doesn’t account for the ups and downs of the stock market, but by putting in different annual returns, you can see how the withdrawals eventually start to diminish the account.

You will never be required to do anything but take required minimum distributions. The only raw spot is that if you build the account enough, the rising RMD percentages will eventually force you to take more taxable income than you need. They could also put you into a higher tax bracket. Lots of people grind their teeth about this, but it’s a nice problem to have.

I have a question about a retiree’s homestead and concerns about future nursing home needs. I have an aunt and uncle who are both retired and in their late 60s. They own their home free and clear. I would estimate the value between $50,000 and $100,000.

My aunt said recently that they’re considering transferring ownership of the house to one of their sons so they could qualify for nursing home assistance in their later years. They have no other assets. Social Security is their only income. They have no retirement accounts or savings.

A figure of $2,000 sticks in my head as a magic number related to what you can have in financial assets. I told her that I thought she was mistaken, that the homestead is exempt from Medicaid means testing. I’m concerned that “giving” their house to their son could create more trouble than benefit.B.P., Dallas

You’re right on both counts. That $2,000 figure is correct. Your instincts are also correct on keeping the house. A home is an excluded asset as long as one of them lives in it or one of them declares intention to return to it.

Scott Burns is a syndicated columnist and a principal of the Plano-based investment firm AssetBuilder Inc. Email questions to scott@scottburns.com.

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